Fernie lies on the Elk River, along Canada's southernmost east-west transportation corridor through the Rockies that crosses the range via the Crowsnest Pass, 40 kilometres (25 mi) to the east. As the largest and longest-established community between Cranbrook and Lethbridge, Fernie serves as a minor regional centre, particularly for its fellow Elk Valley communities.

Fernie is the only city-class municipality in Canada that is fully encircled by the Rocky Mountains. The townsite was laid out in the crook of a doglegged glacial valley that today is drained by the Elk River. Three tributaries of the Elk—Coal, Lizard, and Fairy Creeks—rise in its side valleys and join the Elk either within or in close proximity to the townsite.

While the slopes of the mountains are the present focus of economic activity, until comparatively recently residents of the area were more interested in the mountains' innards. The vast Crowsnest Coal Field lies just to the east of the city, and Fernie owes its origins to nineteenth-century prospector William Fernie, who established the coal industry that continues to exist to this day. Acting on pioneer Michael Phillips' twin discoveries of coal and the Crowsnest Pass a few years earlier, Fernie founded the Crows Nest Pass Coal Company in 1897 and established a temporary encampment near Coal Creek. The Canadian Pacific Railway arrived in the valley the following year, and a townsite emerged parallel to the railway line slightly north of the initial encampment, or "Old Town." An Internment camp was set up at rented premises in Fernie from June 1915 to October 1918. [4]

Underground coal mines were dug 10 kilometres (6 mi) away from the townsite in the narrow Coal Creek valley and until 1960 a small satellite community known as Coal Creek stood adjacent to them. A variety of other mines were sunk into the coal fields in a fifty-kilometer radius in the following two decades. No mining was ever carried out in Fernie proper; coking of Coal Creek coal was carried out at the townsite, but otherwise the town developed into an administrative and commercial centre for the burgeoning industry. Forestry played a smaller role in the local economy and a local brewery produced Fernie Beer from Brewery Creek (mountain spring water).

Like most single-industry towns, Fernie endured several boom-and-bust cycles throughout the twentieth century, generally tied to the global price of coal. The mines at Coal Creek closed permanently by 1960 and the focus of mining activity shifted to Michel and Natal about twenty-five kilometres (15 mi) upriver, which sat on a more productive portion of the Crowsnest Coal Field. Kaiser Resources opened immense open-pit mines there in the 1970s to meet new thermal coal contracts for the Asian industrial market, predominantly for use in blast furnaces. Fernie would remain an important residential base for mine labour, along with the new communities of Sparwood and Elkford that sprang up much closer to these new mines. Today, Teck Resources operates all five open-pit mines, shipping out unit trains (often with more than 100 cars) along the Canadian Pacific Railway through Fernie to the Pacific Coast, where the coal is loaded onto freighters at Roberts Bank Superport in Delta.

After a disastrous fire leveled much of the downtown core in 1904, the fledgling municipal government passed an ordinance requiring all buildings in the area to be built of 'fireproof' materials like brick and stone. Consequently, a new city centre rose from the ashes sporting brick buildings along broad avenues that would have looked more at home in a sedate and refined Victorian city than a rough-and-tumble frontier coal town. They were short-lived, however, as a second, larger inferno swept through the city on August 1, 1908. Whipped up by sudden winds, a nearby forest fire burnt its way into a lumber yard on the edge of the community and sparked a Dresden-style firestorm that melted brick and mortar and essentially erased the entire city in an afternoon. There were few casualties, however, and for a second time a stately brick downtown core rose from the ashes. Today, these historic buildings, most of which still stand, are a treasured and distinctive feature of the community.

Downtown Fernie was used for the downtown of the fictional Kodiak Valley ski resort in the 2010 Hollywood film Hot Tub Time Machine.